Marc Levinson

Tag: Value Chains

  • Of Value Chains and Inflation

    What do central banks have to do with value chains? Traditionally, not much. I think that’s one reason for the resurgence of inflation in many countries during the COVID-19 pandemic. There had been little study of the connection between global value chains and monetary policy, so when disruptions in international trade flows began driving up prices in 2021, central bankers were uncertain about what to do. While politicians are playing a typical blame game—in the United States, Republicans have pinned the inflation surge on the Biden Administration’s spending, while Democrats point to the massive increases in shipping costs and import prices—something of a consensus seems to be emerging among economists that the responsibility for the unusually high inflation rates from 2021 through 2023 lies with central banks. 

    The question of how central banks should respond to value-chain disruptions has become the subject of serious study. One paper published earlier this year finds central banks’ interest-rate increases more effective in taming inflation and less damaging to economic growth in the midst of supply-chain disruptions than under more normal conditions. A different analysis, updated in November 2024, agrees that strained supply chains strengthen the effectiveness of monetary policy in controlling inflation. An International Monetary Fund study of 29 African countries argues that while central banks can’t keep supply-chain disruptions from driving up prices of traded goods, they can limit the impact on non-tradable products by raising interest rates quickly. An interesting paper based on European data finds that the greater a country’s role in international value chains, the more quickly the central bank needs to tighten monetary policy in the event value chains become unsettled.  

    The implication of this research seems to be that the Federal Reserve and other central banks should not sit on the sidelines if value-chain disruptions start driving up inflation. During the pandemic, they should have begun hiking interest rates sooner than they did. At the end of 2020, the members of the Fed’s Open Market Committee, which sets interest rate policy, projected that consumer prices would rise only 1.7% in 2021, so they took no action when value-chain tangles drove up their favored inflation gauge, the personal consumption expenditures price index. That’s why U.S. consumer prices soared, rising about 8% between January 2021 and the Fed’s approval of a very tentative interest-rate increase in March 2022. The bottom line seems to be that there’s nothing about global value chains that makes it intrinsically harder for central banks to control inflation.  

  • The Value of Value Chains

    Usually, the action at the American Economics Association’s annual meeting revolves around weighty pronouncements by prominent economists. What I found striking about this year’s meeting, which was held in New Orleans the first weekend in January, was the considerable attention devoted to value chains. These sessions didn’t attract the huge crowds of the ballroom speeches about inflation and innovation, but they did offer some interesting insights.

    One important development is the use of data about individual firms to understand how value chains actually work. Some of the most useful data comes from tax records, which may provide a detailed picture of business-to-business relationships. One such study, presented by Felix Tintelnot of the University of Chicago, uses Belgian tax and customs filings to show that imports account for a far greater share of domestic consumption than the government estimates. A study presented by Yuhei Miyauchi of Boston University, using tax data from Chile, shows how COVID-19 quickly disrupted relationships among domestic firms, forcing value chains to be forged anew. A paper offered by Nitya Pandalai-Nayar of the University of Texas, based on firm-level data, reports that 44% of U.S. factories export, more than twice the rate estimated from government surveys. One consistent finding: traditional trade statistics don’t offer an accurate picture of how value chains work.

    Other presentations discussed such matters as firms’ responses to input shortages, ports’ responses to shipping delays, the use of inventories to manage supply-chain risk, and the role of interest rates as a driving force behind globalization. The common thread is that time-worn two-country, two-commodity models of international trade have given way to the understanding that trade is undertaken by firms engaged in complex relationships, not by countries exchanging cloth for wine.

  • Stuck in the Mud

    On the morning of March 23, a container ship called Ever Given ran aground in the Suez Canal, blocking passage to the 50 or more vessels that transit the canal each day between the Red Sea and the Mediterranean. This disruption to global supply chains is likely to prove extremely costly. The grounding is one more example of how the shipping industry’s insane quest for size and scale has made global value chains more fragile and less reliable.

    Ever Given was launched in March 2018. The ship, a quarter-mile long and nearly 200 feet across, is reportedly able to carry the equivalent of 20,388 20-foot containers — enough cargo to fill more than 10,000 over-the-road trucks. It was en route from China to Northern Europe, one of the few ocean routes on which such enormous vessels are practical. The number of containers on board at the time of the grounding has not been disclosed, but in recent months load factors on the Asia-Europe route have been high.

    What went wrong? At this point, much is speculation. But the vessel’s massive size was likely a factor, for at least two different reasons.

    The first is that ultra-large container ships need deep water: when the ship is fully loaded, the deepest part of Ever Given‘s keel lies 15.7 meters — nearby 52 feet — beneath the water line. If a ship of that size wanders out of the proper channel, it can quickly wander into trouble.

    The second factor that may have contributed to the grounding is the ship’s heavy load. The only way to fit 10,000 40-foot containers aboard a single ship is by stacking boxes high on its deck. Ever Given, photographs suggest, had containers stacked 10-high from stem to stern, in addition to the many boxes in its hold. Steaming north through the canal, it would have presented a solid 80-foot-high wall longer than four football fields to winds blowing from the west. If, as reported, a wind storm struck the canal that day, it is easy to imagine how the vessel could have been blown off course. Something similar happened to Ever Given before. In February 2019, less than a year after its launch, high winds pushed it up against a ferry in the Elbe River in Hamburg, with unfortunate consequences for the ferry.

    The price tag on the physical damage is likely to be far less than the cost of the economic disruption the grounding has caused. Hundreds of ships have been delayed, each potentially facing tens of thousands of dollars per day in crew wages and lease or mortgage payments while it rests at anchor. The bill facing cargo owners will be even higher, as they face the carrying costs on the tens of billions of dollars’ worth of cargo marooned aboard vessels now moored at either end of the Suez Canal.

    It’s not clear whether they will be able to recover these losses, or who might pay for them. Like many merchant ships, Ever Given has a complicated chain of control, with its Japanese owner having chartered it out to a Taiwanese ship line which engaged a German company to operate it. Future litigation promises to be interesting.

    The Ever Given incident is one more demonstration of the vulnerabilities of extended value chains, a subject I discuss in Outside the Box. An accident can happen to any ship, and the potential cost needs to be factored into decisions about where to make things and how to transport them.